<p>"A venture capital fund may accurately report the value of an LP’s share of underlying investments as $X. However, if the LP can only sell its interest in the VC partnership in the secondary market for .5X, what value should that LP show on its Balance Sheet? "</p>
<p>So Chidad, if I can only sell the whole and not the pieces…how can I value the investment by adding up the pieces? And are the pieces liquid if they can be separated out?</p>
<p>This is a common, banal accounting problem. For a whole bunch of reasons – lack of a developed market, restrictions on transferability, lack of meaningful voting rights, and paucity of verifiable information – private equity investments are ALWAYS only salable, if at all, at a huge discount to underlying net asset value. And, most of the time, for any particular fund, there isn’t enough contemporaneous market data to get a reliable market price. That would imply, however, that on the day they invested the limited partners lost half their money, which doesn’t seem like a particularly realistic view of things.</p>
<p>On the whole, at least in the past, fund sponsors’ NAV estimates have been reasonably accurate as predictions of what the limited partners will ultimately realize from the funds. That may indeed be “broken” now, but I don’t know why it would be any more broken than the never-functioning secondary market.</p>
<p>dstark: Limited partners can’t sell the pieces, but they can’t really sell their overall piece of the whole, either. The fund itself can and does sell the pieces, and it distributes the net proceeds piecemeal to the limited partners over the life of the fund (which tends to be targeted at 10 years, with liquidations exceeding investments by year 5 or 6).</p>
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<p>Not to pick on Stanford, but I think those kinds of statements from colleges are a bit disingenuous. I agree on one level. If the markets don’t tank from here, I think that after three successive years of cost-cutting and tution increases, the financially strong institutions will be able to say they’ve restored financial equilibribrium. Some with a moderate pain. Some with a lot of pain. Some with excrutiating pain.</p>
<p>At the end of that three years, however, they will certainly not be back to the fat n’ happy days enjoyed in recent years. Getting back in equilibrium will have entailed staff reductions, pay freezes, stopping construction projects, and a host of other things that will be difficult to sustain. The debt loads (and probably inflationary debt service costs) will not allow the schools to just pick up where they left off unless they are seeing double-digit annual returns from the endowments.</p>
<p>Look at the graph of future endowment spending rates on page 7 of this Amherst PDF:</p>
<p><a href=“https://www.amherst.edu/media/view/121423/original/Amherst_economy_summer_2009.pdf[/url]”>https://www.amherst.edu/media/view/121423/original/Amherst_economy_summer_2009.pdf</a></p>
<p>Now, Amherst happens to have mismanaged its endowment into a real mess, but the trends shown here are, from everything I can tell, fairly universal. There are going to be have to be some structural changes over the next three years at elite colleges and characterizing the endpoint as “business as usual” isn’t painting a complete picture, IMO.</p>
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<p>Debt is treated as an operating expense in the form of debt service in the annual budgets. You raise a very real issue. How do you compare the endowment of Amherst (which just borrowed $100 million instead of taking an endowment draw and now as $320 million in debt) with the endowments of similar schools that didn’t borrow to meet cash needs and took their normal endowment draw?</p>
<p>In the past, it wasn’t much of an issue because schools only borrowed to pay for new buildings (like 30 year mortgages) and they all had similar levels of debt (within a narrow class of peer schools).</p>
<p>I think you really do have to substract borrowing to meet payroll and cash calls from the endowment value, but that’s a briar patch, too.</p>
<p>How does it look like Princeton is doing relative to HYS etc?</p>
<p>[Princeton</a> University - Tilghman provides update on University’s budget outlook](<a href=“http://www.princeton.edu/main/news/archive/S25/41/95I57/index.xml?section=topstories]Princeton”>http://www.princeton.edu/main/news/archive/S25/41/95I57/index.xml?section=topstories)</p>
<p>[Princeton</a> University - Tilghman letter updating the University community on the impact of the economic climate](<a href=“http://www.princeton.edu/main/news/archive/S25/41/94G77/index.xml]Princeton”>Tilghman letter updating the University community on the impact of the economic climate)</p>
<p>Interest, I see where Stanford just reported a 27% decline but unlike other Universities it did not take a draw from the endowment, instead it used its $1billion in borrowing. Most other U’s have said their endowment value was impacted by the decline in investment performance and their annual draw of 4-6%. Net-net I think you have to subtract debt from the endowment to get at a net endowment value certainly to gauge the financial condition of the U and in my mind also to guage the performance of the endowment.</p>
<p>As far as Princeton I think their biggest problem is that the endowment funds 50% of their operating costs. And their approach is to really increase the payout(around 8% I think) from the endowment and over 3-4 years take out almost $100million a year from their costs to eventually get back down to 5%. I don’t think this approach is fair to the staff who must be wondering if they are still going to be around after year 2 or 3 or to the students who need to know if their programs are going to be around.</p>
<p>It blows my mind to read the Prez of Princeton try to rationalize, with a straight face, why it was really a good thing that the school with the biggest per student endowment in the world had to put its payroll and light bill on a credit card this year because they didn’t have any cash. Amherst is trying to claim similar briliance. They must think we are really stupid.</p>
<p>It’s pay me now or pay me later. The debt service on that billion dollars of additional debt is causing the outyear budget problems at these schools as they pay off 2009 operating expenses for 30 years. Even worse, I think it’s all variable rate debt which feels good right now but carries major risk in a post-recession inflationary period.</p>
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<p>As some of these schools are finding out paper assets in an endowment does not equal cash in a bank account.</p>
<p>Is there any evidence yet that these financial problems are causing any changes in admissions? Any reduction in financial aid anywhere or any decease in need blind admissions?</p>
<p>birdrock:</p>
<p>It’s really only possible to talk about finances and admissions and stuf at specific individual colleges. Even within the same tier, different schools face different challenges. For example, Amherst has issues that other colleges in the same academic and endowment tier do not face.</p>
<p>Swarthmore reported this week that their financial aid costs were up, but ony modestly and within their budget planning. I think that’s fairly typical of the very top tiers. Yield was very high this year (a bit surprising to me).</p>
<p>A short hop and skip down the ladder to Middlebury and Bowdoin, you are starting to see just a little nudge towards being need-aware, at least for waitlistees. These schools are definity trying to put a ceiling on aid budgets.</p>
<p>There are some schools bravely trying to stay need-blind that really can no longer afford to do so. Vassar is keeping their need blind policy, but spending 7.6% of endowment this year. If I were a full-pay customer, I’d dangle an application.</p>
<p>I guess the short answer is that there is a subtle effect on admissions, but the colleges are trying to keep it on the down low. We’ll know more when the admissions and financial aid data for this year starts showing up.</p>
<p>A lot of colleges are increasing enrollment to generate some dollars. That will backfire in the long run (diluting the endowment), but it is something to consider now for its impact on class sizes, dorm space, etc.</p>
<p>Thanks for the post and all these replies. Good reading.</p>
<p>JHS, thanks for post #202.</p>
<p>Here’s a link on Stanford’s latest plans:</p>
<p>[peHUB</a> Plot Thickens Over Stanford Secondary Sale](<a href=“http://www.pehub.com/51571/plot-thickens-over-stanford-secondary-sale/]peHUB”>Plot Thickens Over Stanford Secondary Sale | PE Hub)</p>
<p>Chidad, why would they want to do this “joint venture” arrangement mentioned in the article? Why not just go ahead and sell their PE interests?</p>
<p>Language is such a funny thing, isn’t it? I love the way the article refers to Stanford’s $5 billion in cash call commitments as an asset. Hmmm, maybe we should call credit card bills assets, too?</p>
<p>I see that Stanford is budgeting to spend 6.6% of their endowment this year. That’s really a disasterous number. Imagine what it would have been without the market recovery? The debt service for the colleges that had to borrow due to mismanaged liquidity is compounding the budget squeeze everyone is feeling from declining endowments. </p>
<p>The Stanfords took more of an endowment hit AND increased their budget problems with the debt service on borrowing to meet payroll. I’m seeing colleges that are able to hold their endowment spending to 4.0% to 5.5% this year with less severe budget cuts - mostly because they aren’t having to shell out for debt service to cover cash calls. The aggressive guys are really taking on water.</p>
<p>I heard the new chair of the investment committee at Swarthmore joking at the podcast of a Q&A session in Washington Tuesday night (he’s able to joke because the endowment only lost 16.8%). He said that the investment committee hadn’t done some of the “stupid stuff” people are reading about and that he was very proud that the school wasn’t making headlines about investment performance. Ironically, the head of their investment committee up until last month was the Emeritus Professor and guru of Investment Banking at the Harvard Business School.</p>
<p>sm74:</p>
<p>I suspect that joint venture deals might be the only way to sell the stuff. My guess is that Stanford is packaging pools of good PE investments to sweeten the bad stuff. Otherwise, they just end up getting cherrypicked and left holding the worst of the worst as they try to solve their cash crunch.</p>
<p>Also, outright sales might establish a market price that they don’t want anybody to see in case it triggers an instant write-down of their entire endowment. These guys are all playing a shell game on valuations right now and it’s important that nobody upset the apple cart of the agreed upon valuations being assigned to the PE portions of endowments.</p>
<p>Also, buying high and selling low is traditionally not a winning strategy. And now is really, really low, especially considering the discount to NAV that will doubtless be involved. It could always go lower, of course, but they are not likely to bet on that. And they don’t NEED to sell all of their PE. So why not sell a participation, and not look like morons if the private-company market recovers in the next 4-5 years?</p>
<p>In addition to which, a purchaser (unless it is Harvard, which would not be likely) would take a certain amount of comfort in co-investing with Stanford. Fund sponsors have every power and tool they need to thoroughly screw their investors. If they screw a huge, constant institutional investor like Stanford, however, they will have a lot of trouble raising any subsequent funds. I would much rather invest alongside Stanford than take it out altogether.</p>
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<p>Yeah, because Stanford has shown they really know how to pick 'em, right? <grin> </grin></p>
<p>Let’s see. They lose 10% more than most colleges. They have to borrow $1 billion to cover payroll, and they are still spending 6.6% of endowment this year. Ouch.</p>
<p>I am just amazed that these people are still sitting around the same board tables and investment committees with seemingly no accountability, no mea culpa, no explantions, and no outlne of how they intend to prevent the same kind of mismanagement in the future. </p>
<p>If your college started the year with one of the biggest endowments in the world and ended the year having to borrow money to pay the utility bill, somebody should be getting fired or committing hari kari. Instead, the same guys are still yukkin’ it up and slappin’ each other on the back.</p>
<p>Who is going to hold these people accountable Interesteddad? Who has an interest in checking and making sure that these “private investments” are actually worth anything? No-one wants to hear that news. And the private equity guys know that and took advantage of it.
As the Penn investment manager-who did as good a job as anyone in avoiding this mess-said there is alot more bads news to come. I still think these U’s haven’t faced up to how serious a problem they have.</p>
<p>Alumni should be demanding board resignations. It is stunning, however, just how little interest this story generates among students, parents, and alumni most impacted by it. The guys just lost all the money alumni have donated over the last five or ten years. Students are gong to be impacted in real ways. Give you an example. Williams will no longer offer linguistics courses after this year. That’s a real cut from a school that fared well. This is a huge story impacting every student at every college in the country, yet there is almost no interest in it, even on a website like this one devoted exclusively to those most interested in elite higher education.</p>
<p>Students and parents should be posting like crazy on the college-specific pages here to find out what is being cut.</p>
<p>^^^ At my alma-mater, where DS is a junior, I can tell you what’s NOT being cut: the grass. </p>
<p>Literally, they are mowing the grass less frequently as one of their cost-saving measures. LOL.</p>